Money Laundering

Money laundering is a criminal act of legitimizing the money acquired through illegal or unethical means by disguising the origin of the crime. It usually involves the creation of assets to conceal the relationship between the funds and their dirty sources. People do laundering by often exploiting the vulnerabilities of legal or financial systems.

They can use this for financing terrorism, nuclear, biological, or chemical weapon acquisitions. It promotes economic instability, corruption, and crimes of varied nature, such as drug and human trafficking. Theft, embezzlement, investment, and tax fraud are consequences of laundering. If left unchecked, it can disrupt the social and economic fabric of the countries.

• Money laundering is the act of placing criminal or illegal money into the legal financial system in a way that looks legitimate and does not draw the attention of banks or other law enforcement agencies.
• This is illegal, unethical, and has several negative implications on society's social and financial strata. Crimes fuel further crimes and eventually lead to the destruction of the socio-economic stability of countries.
• It usually involves three stages: placement, layering, and integration.
• Money from illegal activities is usually transferred across borders from one bank account to another or used to buy properties and assets.

Money laundering makes money collected through criminal activities or 'dirty' money look clean or legitimate. It enables people who committed these crimes to enjoy the profits without revealing the origin of their source. They can do this in a lot of ways like obscuring the origin of cash, changing its form, or transferring them to accounts where the funds don't get much attention. They can eventually clean all the money when running through valid businesses and transactions and can enter the economy without raising doubts.

The effects of money laundering are vast, and the majority are concerned with increasing crime rates. For example, it fuels drug trafficking, and when more people get addicted to drugs, they commit further crimes under its influence. Terror financing is also a problem; terrorists hide money to use as a source for their activities, preventing authorities from tracking them and stopping the execution of planned attacks.

Money laundering can make severe impacts on the economy itself. It causes turbulence in the money flow of the system. Uncontrolled inflows of money can increase consumption rates and reflect on the country's imports or exports. This impacts the foreign payments of countries and forces the government to make significant changes in the monetary policies. Policy changes can pressure the prevailing situation and render people jobless or increase inflation rates, making it difficult for people to live or maintain existing living standards. These people can eventually commit crimes which result in a corrupt society.

Although criminals may not necessarily stick to it every time, three main stages are usually involved in the money laundering process. They are:

#1 - Placement

The placement stage denotes the deposition of the illegal proceeds into a bank account (home or abroad). For example, people can transfer cash as goods (luxury items), precious jewels, or even cheques and convert it into other currencies. They can then transport these valuables or money abroad, away from their source of origin, i.e., where they committed the crime, to a country with the ease of investment and deposition. Transportation can be through any mode of transport, and usually, third party individuals or corporations make an involvement. However, they can hold the money gained from tax or investment frauds in bank accounts and transfer it electronically.

#2 - Layering

Disguising the origin of the criminal proceeds is what happens at this stage. This process involves many complications and the purpose is to hide all the traces of dirty money. People can transfer money and split it into multiple accounts amongst countries, individuals, or corporations. They use banks with strict privacy policies for this, and offshore corporations are nominated as bank account holders. There can also be constant transactions in the account, changing currency, and converting money into physical assets.

#3 - Integration

Integration is the stage where criminals create the "legal" origin of money. In other words, the money has now re-entered the economy without anyone noticing. Some of the ways this can happen are:

• Covering up the money as business income by providing false proof of capital gains or loans.
• Using the money in third-party transactions and creating fake invoices, contracts, deeds, and agreements.
• Price manipulation of invoices turns over's and sales proceeds by mixing legal and illegal sources of income.
• Buying properties and disguising the ownership details

They can then invest the money as properties, real estate, securities, and other financial instruments, cryptocurrencies, or used for funding legal or illegal businesses. They can also consume the money leading a rich lifestyle and purchasing expensive items.

Given below are two money laundering examples that can give a better idea:

Example #1

Let's take the example of Harry. Harry is a drug dealer, and he profits from his illegal dealings. To make the authorities believe that his income has credible sources, he decides to open fast-food restaurants near his house and shell companies that exist only on paper in a tax haven territory - the Cayman Islands, where his income taxes, capital gains, and corporate taxes were exempt. As a result, Harry can spend all he wants, buy properties, sell them and make even more money by fooling the system through these companies. Since the law permits shell companies to hold cash, properties, and assets, he now has a source of income to show and a method to evade taxes that accrue from them. Harry thus takes part in money laundering, which is a crime.

Example #2

In 2004 one of the famous Money laundering cases, "Wachovia," happened.

When the U.S- Mexico border clashes escalated, investigating agencies unveiled that the illegal money from the drug trade in Mexico got into the banking system through one of the then biggest U.S banks, Wachovia. 

Authorities seized a jet containing cocaine, and further investigations revealed the flow of wired transfers, traveler's cheques, and other details of cash shipments through Mexican exchanges into the accounts of Wachovia. There were also reports of interbank loans funded through the same. In this case, the traveler's cheques were deposited in Euros with sequential numbers and large amounts. The amounts deposited were unusually more than what a normal traveler would need, and most of them had incomplete KYC or doubtful signatures.

Moreover, billions of money were transferred into dollar accounts from Casas de Cambio (CDCs) in Mexico, the currency exchange houses involved in business with the bank. Through these CDCs, individuals in Mexico had access to hard currency. As a result, they were able to wire transfer the currency value to U.S bank accounts to facilitate purchases in the U.S or other countries. CDC's business nature allowed money launderers to move currency from Mexico into these CDCs and eventually into the banking system of the U.S. 

This is a classic example amongst a hundred other laundering cases that demonstrate how launderers infuse huge amounts of money into the system with fraudulent methods.

Money laundering is a serious issue, and governments can tackle it by taking steps such as:

• Governments can make it a crime if it hasn't been made. Accordingly, they can give investigating agencies the power and authority to trace the criminals and confiscate properties and assets.
• Build a sound framework of the law. The government can do this by making the money laundering act strong with stricter protocols, and ensuring strict adherence. For example, they can provide proper KYCs for all business and financial transactions.
• Ensure smooth cooperation between different departments of the same government. For example, the legal and financial departments have to work together, and countries shall take necessary steps for the same.
• Build a social network of countries so that countries can pass necessary information seamlessly and without delay to prevent further crimes.

This has been a guide to Money Laundering & its Meaning. Here we discuss how money is laundered, stages, examples, and how to prevent it. You can learn more about accounting from the following articles –

• Forensic Accounting
• White-Collar Crime
• Black Economy